2013 (10) TMI 374 - HC - Income Tax

Allowability of Depreciation, when income is computed on estimate basis after rejection of books of accounts - Penalty u/s 271(1)(c) of the Income Tax Act was levied Held that - Upheld Net Profit @ 3.5% estimated by the Tribunal, being question of fact. But directed the A.O. that no separate deduction like depreciation will be allowed - When the Net Profit is made on estimate basis after rejecting the books of account, then no deduction including depreciation is allowed - When the books of accounts were rejected, then the assessee is not entitled for the depreciation separately on the same set of books of accounts which have no value after its rejection - Penalty orders, which are consequential to the quantum appeals, have become meaningless. Therefore, the penalty orders are not sustainable.

Summary

Issues Involved:

1. Cancellation of penalty under Section 271(1)(c) of the Income-Tax Act, 1961.
2. Justification of the net profit rate estimation.
3. Allowance of depreciation on estimated net profit.

Issue-Wise Detailed Analysis:

1. Cancellation of Penalty Under Section 271(1)(c):

The primary issue was whether the Income Tax Appellate Tribunal (ITAT) erred in cancelling the penalty of Rs. 50,00,000 levied under Section 271(1)(c) of the Income-Tax Act, 1961. The Department contended that willful concealment is not an essential ingredient for attracting penalty, referencing the Supreme Court's decision in Union of India Vs. M/s Dharmendera Textile Processors. The Tribunal had cancelled the penalty without considering that false or exaggerated claims of expenditure or deduction are covered under concealment of income/furnishing inaccurate particulars of income. Furthermore, the Tribunal failed to appreciate that the rejection of books of account by the Assessing Officer (AO) was upheld by the Tribunal itself, indicating specific defects in the books, which is clear proof of concealment of income.

2. Justification of Net Profit Rate Estimation:

The second issue was whether the ITAT was justified in reducing the estimated net profit rate to 3.5% from the 10% rate applied by the AO and allowing depreciation from it. The Department argued that the Tribunal's reduction of the net profit rate was arbitrary and did not consider the AO's findings. The Tribunal's decision resulted in a negative figure or marginal profit in some assessment years, which defeated the purpose of estimating income. The Department cited the Supreme Court's observation in CST Vs. H.M. Esufali H.M. Abdulali that some guesswork is inevitable in estimating escaped turnover and emphasized that the Tribunal must pass a reasoned order reflecting the application of mind to the issues raised, as per CIT v. Palwal Co-operative Sugar Mills Ltd. and CIT v. Mandsaur Ferro Alloys Ltd.

3. Allowance of Depreciation on Estimated Net Profit:

The third issue was whether the ITAT erred in allowing depreciation over and above the net profit of 3.5%. The Department argued that the net profit rate applied by the AO already included depreciation, and it could not be claimed separately. The Tribunal's reliance on outdated circulars and case laws was also challenged. The Department referenced Section 44-AD of the Income-Tax Act, which stipulates that no further deduction, including depreciation, is allowed once the net profit is estimated. The Department cited various judgments, including Commissioner of Income Tax v. Gian Chand Labour Contractors and Indwell Construction v. CIT, to support their argument that the net profit rate includes all deductions, and no separate allowance for depreciation is permissible.

Judgment:

The High Court upheld the net profit rate of 3.5% estimated by the Tribunal but directed that no separate deduction for depreciation would be allowed. The Court reasoned that when the net profit is estimated after rejecting the books of account, no further deductions, including depreciation, are permissible. Consequently, the penalty orders, which were consequential to the quantum appeals, became meaningless and were not sustainable. The Tribunal's order regarding the penalty was upheld.

Conclusion:

The High Court concluded that the answer to the substantial questions of law is partly in favor of both the assessee and the Department. As a result, the appeals related to penalty (Income Tax Appeal Nos. 94 of 2007, 130 of 2006, 93 of 2007, 107 of 2007, 108 of 2007, and 44 of 2009) were dismissed, while the appeals related to quantum (Income Tax Appeal Nos. 127 of 2007, 128 of 2007, 129 of 2007, 130 of 2007, 131 of 2007, and 135 of 2006) were partly allowed.